Problem 1 - (Jaguar Corp.)
At the beginning of Year One, Jaguar Corporation purchased a license from Angel Corporation that gives Jaguar the legal right to use a process Angel developed. The purchase price of the license was $1,500,000, including legal fees. According to the agreement, Jaguar will be able to use the process for five years.
Record Jaguar's purchase of the license.
Record amortization of the license at the end of Year One assuming the straight-line method is used and there is no expected residual value.
What is the net book value of the license reported on Jaguar's balance sheet at the end of Year Three?
Problem 2 - (American Corp.)
The American Corporation and the French Corporation are identical in every way. Both companies spend $200,000 for research costs in Year One as well as $100,000 in development costs during that same year. The American Corporation follows U.S. GAAP. The French Corporation follows IFRS and believes these development costs meet the criteria for capitalization. The capitalized costs are amortized over four years using the straight-line method and the half-year convention.
What is the difference in reported net income between these two companies for Year One?
Assuming no further amounts were spent for research and development in Year Two, what is the difference in reported net income between these two companies in that second year?
Problem 3 - (Yankee Corp.)
In Year One, the Yankee Corporation allegedly damaged the Sox Corporation. The Sox Corporation sued the Yankee Corporation for $1 million. At the end of Year One, both companies believed that an eventual payment of $300,000 by Yankee was probable, but a payment of $480,000 was reasonably possible. The case moved through the court system rather slowly, and at the end of Year Two, both companies had come to believe that an eventual payment of $340,000 by Yankee was now probable, but a payment of $700,000 was reasonably possible. In Year Three, this lawsuit is settled for $275,000 in cash.
Determine the income effect to be reported by each company for each of these three years.
Discuss how the financial reporting might be different if these companies were reporting according to IFRS instead of U.S. GAAP.
Problem 4 - (Atlanta Company)
On January 1, Year One, the Atlanta Company sues the Seattle Company for $100 million for patent infringement. The case is expected to take years to settle. For each of the following independent situations, indicate the financial reporting to be made by each company.
Both companies believe that Atlanta will probably win this case. However, both feel that estimating the amount of this loss is virtually impossible.
Both companies believe that Atlanta will probably win this case. Both feel that Atlanta will probably win approximately $9 million, but a win as high as $46 million is reasonably possible.
Both companies believe that a loss by Seattle of $53 million is reasonably possible.
Atlanta officials believe that their company will probably win $44 million whereas Seattle officials believe that their company will probably lose $8 million.